The Chinese economy is still booming for the time being. In 2017, the People's Republic's gross domestic product grew by 6.9 per cent – more than in the previous year. Chinese economic planners foresee similar numbers for 2018, expecting GDP growth of between 6.5 and 6.8 per cent, while the International Monetary Fund’s (IMF) growth forecast is 6.6 per cent. Foreign trade also continues to show robust development. In January, exports increased by around 11 per cent (to 200.52bn USD), while imports increased by nearly 37 per cent.

However, one uncertainty factor for China’s economy is the ongoing trade dispute with the US, which has steadily been escalating over the past few weeks. Following the imposition of punitive tariffs on certain stainless steel products (174 per cent), solar panels (30 per cent) and washing machines (up to 50 per cent) from China in January, the past week saw further actions taken in line with President Trump’s protectionist “America First” strategy. On Wednesday, the US Department of Commerce passed protective duties of up to 109 per cent on cast-iron subsurface pipes; the day before, accessories for larger welded pipes from China had already been subjected to punitive tariffs of up to 132 per cent. In addition, Trump threatened to impose punitive taxes on Chinese steel and aluminium.

US want to reduce trade deficit with China

The measures do not only affect China, but also Canada, Greece, Turkey, India and South Korea. However, the US’s declared goal is to ensure more “balance” in trade deals with China, as the trade deficit with the People's Republic is growing, with far more goods currently being sold from China to the USA than vice versa. For China, this means a trade surplus with the US which has grown by around nine per cent to just under 278bn USD in 2017, making the US the largest contributor to China’s surplus. While this figure dropped by 17 per cent to just under 423bn USD in 2017, it is still quite high.

This bothers not only the US. France has recently also called on China to reduce its surplus and provide better access to the Chinese market for European companies. China’s trade surplus with all EU countries combined decreased by around four per cent in 2017.

In response to the US punitive tariffs, China is conducting anti-dumping investigations in the agricultural sector. Specifically, subsidies for importing millet from the US to China are being targeted. In 2017, the US exported 4.76m tonnes of millet to China, the vast majority of the total 5m tonnes of millet imported by China. According to the Chinese Ministry of Economy, there are indications that prices are below market level – which harms domestic producers. The investigation could have great impact on the US agricultural industry, as China is the largest buyer of US-grown millet and soybeans.

The US reporting season for the final quarter of 2017 is drawing to a close just as the stock markets remain in upheaval. All eyes are focused on the US tax reform, which has begun to leave traces in the results.

Shortly before the turn of the year, the reform just so passed US Congress and was signed by President Donald Trump. Its core element is the reduction of corporate tax from 35 to 21 per cent. At the same time, a one-off levy between 8 and 15.5 per cent on earnings parked abroad was approved. While assets held abroad by companies are already taxed with 35 per cent, the tax was only due when the money was retrieved to the US. Consequently, multinational corporations such as Apple and Microsoft stashed large amounts of money abroad. Those assets are now being taxed with a one-off levy, regardless of whether the money is being repatriated or not.

For some companies, this charge already constituted a large item on the balance sheet for Q4 of 2017, pushing the balance into the red. For example, Microsoft claimed a 13.8bn one-off item in connection with the tax reform, causing a loss of roughly six billion. Intel also slipped into the red due to the extraordinary tax. On the other hand, Apple finished 2017 strongly despite the additional burden and posted a record profit of 20bn dollars thanks to the iPhone X.

Bank shares suffer from lower loss carry forwards

US bank shares were initially also among the losers following the tax reform, suffering not only from the one-off levy on foreign assets, but also from the fact that, due to the lower tax rate, past losses (loss carry forwards) – for example from the financial crisis – can no longer be used as extensively to reduce the tax burden.

As a result, Goldman Sachs and Citigroup posted substantial quarterly losses, while Morgan Stanley and the Bank of America suffered a sharp drop in profits. In the longer term, however, the financial sector expects the tax reform to have a positive impact on earnings, so that the banks’ respective boards were optimistic for the current financial year when presenting their balance sheets.

However, telecom shares such as AT&T and Verizon benefitted instantaneously from the lowered tax, as their business is largely limited to the US, posting extraordinary revenues of billions in Q4. Similarly, Chevron and ExxonMobil oil shares benefitted handsomely from the tax reform.

On 1 February, the USA released significantly positive job market data. At an already very low unemployment rate of 4.1%, a further 200,000 jobs had been created. Hourly wages were up by 2.9% year-on-year. All of this seemed like good news. However, the equity markets interpreted the news negatively, and a few days of in some cases heavy corrections ensued around the globe (so-called flash crashes).

Higher interest rates are eating into company earnings

How so? As a result of this actually positive development, investors assume that inflation could overshoot its target. In the event of strongly rising prices (triggered by higher wages), more significant interest rate hikes by the US central bank could be the consequence. Other asset classes such as bonds would gain in attractiveness (at the expense of equities). The yield level of 10Y Treasury bonds has already hit 2.8% (as of 6 February 2018; source: Bloomberg), which has increased said attractiveness vis-à-vis equities slightly. The higher interest rates could turn into a negative factor for the economy and thus for company earnings.

Equity portion in YOU INVEST portfolios reduced

On the one hand there are worries about interest rates rising above expectations, but on the other hand the economic fundamentals are still good, and company results are very satisfactory. In this challenging environment, we as managers of the YOU INVEST funds decided to cut the equity portion to 50% of the maximum quota. This means an equity ratio of 5% for YOU INVEST solid, 15% for YOU INVEST balanced, 25% for YOU INVEST active, and 35% for the portfolio of YOU INVEST progressive.

Corporate bonds almost untouchable

We had used only 70% of the full bandwidth of equities even before the recent turbulences on the stock exchanges. The bond ratios have remained unchanged. We will be parking the proceeds from the sale of the shares on the money market for the time being. Remarkably, corporate bonds have hardly shown any trace of weakness, which is a positive sign in the event of falling share prices and rising volatility (i.e. price fluctuations). We continue to hedge the currency risks.

The funds of the YOU INVEST range may invest significant parts of their assets under management in the shares of investment funds (UCITs, UCIs) as laid down in sect. 71 of the Austrian Investment Fund Act of 2011.

Since this is a blog, we do not update the data and facts of the respective entries. They are in line with our knowledge at the time of going to press. For the current data and facts in connection with funds, please refer to the information in the section “Reporting”.

From January 23 to 26, key economic and political leaders met once again at the World Economic Forum in the Swiss mountain village Davos to discuss global challenges for trade, politics, and climate. The forum, attended by 70 heads of state and government and around 1,900 corporate leaders, focused on “Creating a Shared Future in a Fractured World”.

Among the numerous topics discussed were the risks and opportunities of the cryptocurrency boom, the Brexit’s consequences for London as a business and financial centre, and the dangers of right-wing populism for society. In keeping with this year’s theme, heads of state from all over the world, such as German Chancellor Angela Merkel and French Prime Minister Emmanuel Macron, stressed the importance of free trade and closer international cooperation. The Chinese government has also shown its commitment to open markets and globalisation.

US Treasury Secretary Mnuchin sends the dollar plunging

In stark contrast to this, US President Trump attended the forum with six of his ministers to deliver his “America First” speech. After having already announced that he would “tell the world how great America is”, Trump’s presence in Davos caused the expected stir. In addition, the President imposed high import duties on solar panels and washing machines from China just before his arrival in Davos, further fueling the trade dispute between the two countries.

A stir also followed US Treasury Secretary Steven Mnuchin’s speech, particularly his comments on the US dollar, which sent the currency plunging. Mnuchin said that a weaker US dollar benefits the US, “as it relates to trade and opportunities”. In response to this, the European Central Bank (ECB) promptly issued warnings of a currency war.

The tension before Trump's speech at the close of the forum was correspondingly palpable. However, fears that Trump would further increase tensions between the US and China and emphasise his protectionist views were ultimately unfounded.

On the contrary, Trump stressed that “America First” does not mean “America Alone” and even kept a foot in the door for a return to the Trans-Pacific Free Trade Agreement (TPP). He also spoke out in favour of a strong dollar, mitigating the US currency’s downward trend triggered by Mnuchin. The press was cautiously optimistic after Trump’s speech: the Neue Zürcher Zeitung saw a possible “hint of a learning process” and the British Times spotted a “significant shift away from ideology and towards realism” in some of Trump's statements.

The Bank of Japan (BoJ) is maintaining its ultra-easy monetary policy for the foreseeable future. At its most recent meeting on 23 January, Japan’s central bank left its deposit interest rate for financial institutions at minus 0.1 per cent, so that banks wanting to deposit money with the BoJ still pay a penalty. The negative interest rate has been in effect since February 2016, the goal being to motivate financial institutions to lend their money for investments rather than deposit it with the central bank.

The move also aims to further boost inflation in Japan. The BoJ recently expressed optimism in this regard, expecting inflation to grow moderately while remaining below target. For Japan – whose economy was paralysed by a deflationary spiral of falling prices, declining wages and a lack of investments for a considerable time – this is a clear improvement. In November, inflation stood at 0.9 per cent year-on-year after 11 months of unbroken increase. However, the central bank is aiming for a significantly higher rate of two per cent, which means that it is unlikely to abandon its ultra-easy monetary policy in the near future.

Japan currently experiencing longest period of growth since the turn of the millennium

In general, the Japanese economy can look upon a positive development, with steady growth for seven quarters. This marks the country’s longest growth phase since the turn of the millennium. Recent figures for the third quarter of 2017 were also better than expected; the GDP grew by 0.6 per cent from July to September compared with the previous quarter. Projected for the year, this amounts to a growth of 2.5 per cent.

Exporters’ contribution to this development is significant, thanks to strong demand from China and the US. In November, exports rose impressively by 16.2 per cent year-on-year, increasing for the twelfth consecutive month. Imports increased even more strongly, rising by 17.2 per cent. However, this can be attributed to the weak yen, which makes oil imports much more expensive.

The upswing is likely to continue this year. The International Monetary Fund (IMF) recently revised its growth forecast for Japan in 2018 upwards to 1.2 per cent – half a percentage point more than in the forecast from October – due to the unexpectedly well-performing economies in Asia and Erope.

The stock market is picking up on the good mood pervading the Japanese economy: The country’s leading index, the Nikkei-225, currently stands at around 24,000 points, the highest level in 26 years.